Group insurance — a tale of cross-subsidies
Superannuation funds need to look to upgrade the design of their insurance offerings, in circumstances where younger members are often subsidising older members, according to a new analysis released by Willis Towers Watson.
The analysis has suggested that the nature of the cross-subsidies is such that equivalent retail products may actually offer younger members better value. The analysis, examining default insurance design, states that one of the most significant design areas many funds were yet to address was the cross-subsidies by age inherent in their default insurance designs.
"Most commonly it is younger members who are cross-subsidising older members, contributing to the erosion of young members' balances," the Willis Towers Watson analysis said.
It said the most glaring age cross-subsidies occurred in default salary continuance insurance (SCI) designs.
"Of the 27 funds in our analysis who offer default SCI, 10 of those (or 18 per cent of all the funds analysed) offer a fixed SCI benefit by age and a fixed SCI insurance cost by age (i.e. a 25-year-old member gets the same cover at the same cost as a 55-year-old member)," the analysis said.
It said that the extent of cross-subsidies this potentially created depended on the age distribution of the fund, but then provided an example based on a hypothetical fund with an age distribution similar to the distribution of the Australian working population.
Using this example, the Willis Towers Watson analysis said members in their 20s were paying over 300 per cent of the true cost, falling steadily to 100 per cent at around age 47, but continuing to fall to below 50 per cent over age 54.
"Not only is this design unfair to younger members, it leaves the fund very vulnerable to changes in age distribution. A one year increase in the overall average age for such a fund can lead to a 10 per cent premium increase, even if claims experience has been in line with expectations," it said.
"One of the areas of focus of the current Productivity Commission investigation into superannuation is whether insurance value is provided in superannuation compared to the cost of an equivalent retail product," the analysis said.
"The sort of cross-subsidies illustrated... cannot be sustainable, as members become more engaged and start to question the value of their default insurance."
"Older members engaged with their insurance may seek out funds with "cheap" cross-subsidised insurance, in much the same way that some members with medical issues have sought out funds with high levels of automatic acceptance," it said.
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